Why Has Silicon Valley Outperformed Boston/ Route 128 as a High Tech Hub?

by Lee Gesmer on December 6, 2007

In a post on TechDirtMike Masnick argues (with references to supporting studies) that the fact that noncompete agreements are enforceable in Massachusetts but not in California has been a major factor in Silicon Valley’s success. A few excerpts from the article:

Ronald Gilson . . . [found that the success of Silicon Valley] had much less to do with cultural reasons and much more to do with the legal differences between the two places, specifically: California does not enforce noncompetes, while Massachusetts does. Gilson looks at a few of the other possible explanations for the difference and shows how they’re all lacking, leaving the difference in noncompetes as being the key difference between the two regions in terms of the flow of information and ideas leading to new innovations.

* * *

. . . [T]he Federal Reserve and the National Bureau of Economic Research, . . . produced some data to back up the[se] findings . . . in their report Job Hopping in Silicon Valley. Their data showed that, indeed, there was much greater mobility in Silicon Valley than elsewhere. Their research further backed up Gilson’s suggestion that it was noncompetes that made the difference by showing that other high tech communities in California outside of Silicon Valley also showed greater job mobility — suggesting it was a California-wide phenomenon.

Finally, to make the case even more compelling, some researchers from Harvard Business School . . . found that “The networks of small companies so crucial to Silicon Valley’s growth would be less likely to develop in regions that enforce noncompetes.”

Having been involved in counseling companies on noncompete issues for 20-plus years, I have to admit that I am suprised to read this. While noncompetes are pervasive in Massachusetts, many judges are unwilling to enforce them, or will enforce them only in part (i.e., “you can’t work in this particular area for a period of time”). The sense of lawyers in Massachusetts is that absent theft or trade secret misappropriate of some sort, enforcing a noncompete is an uphill fight, so better to negotiate than attack head-on. Most noncompete disputes are negotiated to a private resolution.

That being said, the pervasive use of noncompetes in Massachusetts is part of the dark matter of the legal landscape in the state. You know it’s there, exerting some gravitational force, but you can’t see it or measure it. You never really know how many employees didn’t move to another job, didn’t start their own companies, and didn’t take the risk of challenging their noncompete agreements in court. So, the studies cited in the TechDirt post may be correct; like most legal/economic analyses involving complex economies with multiple variables it’s almost impossible to prove a hypothesis with certainty. And, there are so many other tangible and intangible factors that have contributed to the relative successes of Route 128 vs. Silicon Valley that to assign too high a degree of causation to the law on noncompete agreements is probably over oversimplistic.